Iowa cities scrambling to understand impacts of new property tax law

Iowa cities are wrestling with uncertainty as they work to understand the state’s new property tax law and its potential impacts on providing public services, city leaders are saying.

The new property tax law, House File 718, which was approved earlier this month with near-unanimous support in the Iowa Legislature, is designed to limit the amount of new property tax revenue growth that local governments can use in their budgets.

The law was passed shortly after the latest round of property assessments across Iowa showed widespread, dramatic increases. Although increases in property assessments do not necessarily mean a similar increase in property owners’ tax bills, Gov. Kim Reynolds, in signing the bill into law, called it the most significant property tax reform in state history and indicated lawmakers aren’t done yet in cutting taxes.

The new law contains two main provisions, which city leaders say could jeopardize millions of dollars that Cedar Rapids and Iowa City devote to facilities for veterans, free municipal band concerts or public library operations, but that supporters say will add predictability for property owners to the growth of future tax bills:

City leaders are now working to determine how that will impact their future spending plans. Alan Kemp, executive director of the Iowa League of Cities, said the group has received enough questions from city leaders that it has created a website in an attempt to answer some. He said the group also is planning to host webinars and provide training.

“Many city finance staff are beginning to work through the contents of the bill to figure out how it works. We have received numerous calls,” Kemp said. “Until cities understand the actual way the new system works, they will have a hard time determining how the new system may impact their city and its budget.

“The Legislature was quite clear that their intentions were to limit city revenues. We will just have to see how those limits play out.”

A key question for city governments is how the bill treats supplemental tax levies that are now used by some cities.

In Cedar Rapids, that affects levies now used to fund operations and maintenance of the Veterans Memorial Building on May's Island and the Veterans Memorial Commission. In Iowa City, that affects funding for climate action steps and library operations.

According to the new law — and Iowa League of Cities’ advice to city leaders — those specific levies can stay alive for now, but expire in fiscal 2029. That means those government services will then have to be weighed against other priorities for the two cities to stay under a property tax cap — and will no longer stand on their own.

Cedar Rapids anticipates $3M impact

Cedar Rapids City Manager Jeff Pomeranz said the city is looking at an approximately $3 million impact from the bill, though that figure could fluctuate.

The bill will eliminate most supplemental levies, including those for memorial buildings and community bands — affecting the city’s finances.

Cedar Rapids’ memorial levy funds operations and maintenance of the Veterans Memorial Building and the Veterans Memorial Commission. For fiscal 2024, the city charges its taxpayers about 20 cents per thousand dollars of taxable value for the memorial fund. The memorial levy elimination alone will make up much of the loss, Pomeranz said.

The city also charges its taxpayers for operations of the municipal band — for fiscal 2024, that comes to almost 1.2 cents per thousand of taxable value. The levy helps fund the Cedar Rapids Municipal Band, which was founded in 1951 performs free concerts in public parks during the summer.

Other levies also may be affected, but Cedar Rapids officials still are assessing the bill’s overall impact, Pomeranz said.

“It’s going to be left to the city to decide whether those are continued as part of our regular budget or how that will impact when we lose those dollars,” Pomeranz said.

Overall, Cedar Rapids property owners will see a city tax rate of nearly $16.25 per $1,000 in taxable value for fiscal 2024.

The city could opt to fund the municipal band and Veterans Memorial Building operations within its existing budget to stay under a mandated general fund tax cap. But carving out funding for those items would impact spending on other programs and services in future years.

“That will have an impact on the rest of our organization or we’ll have to make cuts to those expenditures that were funded by the supplemental (levies),” Pomeranz said.

Ultimately, he said the Cedar Rapids City Council would have to decide what to prioritize in future budgets.

‘Difficult to project’ impact, Iowa City official says

Iowa City City Manager Geoff Fruin said it’s difficult to project the long-term impacts of the legislation because there are unknown variables, including the future rate of taxable growth in Iowa City.

“Our goal is going to be to continue to offer the same level of services across our organization while only asking for the amount that we actually need from our residents, and we’ve done that over the last decade through the previous tax reform efforts,” Fruin said.

The city’s property tax rate has decreased every year from the 2012 to 2023 budget years. The property rate for fiscal year 2024 remains at $15.63, the same as fiscal 2023. But as assessments go up, tax bills could increase, too, despite the rate staying the same.

The city does not know what the financial impact will be of new property tax exemptions for homeowners 65 years and older, as well as an increased exemption and credit for property owners who are veterans.

“But, ultimately, property owners that meet those criteria will pay fewer property tax dollars, and thus, other property taxpayers will pay a greater share of taxes to support municipal operations,” Fruin said.

For Iowa City, an emergency levy that funds climate action steps and the library levy eventually will be eliminated, Fruin said. The values of these levies — 20 cents per thousand of taxable value for the emergency levy and 27 cents for the library levy — will simply be added to the general fund levy and stay intact for now — but are set to expire in fiscal 2029.

And that will force a decision then of how the city can sustain the services and still stay under the general fund levy cap.

“What this legislation is going to force is for us to prioritize those efforts along with all the other general fund operations, which include things like public safety and parks and recreation,” Fruin said.

Borrowing threshold change ‘beneficial’

Another aspect of the legislation is increasing the borrowing threshold for city and county projects. Previously, if a nonessential project cost more than $700,000, it had to be approved by the voters.

That bonding threshold was adjusted for inflation, and is now $910,000, or $1.3 million for cities with a population more than 75,000 residents.

“The modernization of the municipal bonding laws that occurred through this legislation will be extremely beneficial to cities,” Fruin said.

Iowa City will cross the threshold of 75,000 residents come the fiscal 2025 budget, Fruin said. This, he said, will allow Iowa City to be more efficient with some of its capital improvements — which could include renovation projects in city facilities or city parks — and reduce the amount of disruption that comes with them.

Comments: (515) 355-1300, erin.murphy@thegazette.com